International Business Law Advisor : Miami International Business Lawyer & Attorney : Santiago Cueto Law Firm : Florida and Global Business Litigation

Its incredible how every business discussion these days centers on China.  While the U.S. and Europe struggle to get things moving, China continues to dominate the world's leading economic indicators.  GNP. check. GDP. check. FDI. check.

As more U.S. companies shift production to China, competitive forces have upped the ante for businesses to deliver the best price points. Because of the hyper-competitive nature of Chinese sourced products, some companies either unwittingly or by choice engage in some questionable business maneuvering to gain even the slightest of price advantages.

Now more than ever U.S. enforcement agencies are  keeping a vigilant eye on these suspicious business practices. Fun fact: The Department of Justice and Securities and Exchange Commission set a record in 2009 by bringing more FCPA prosecutions than in any prior year in the FCPA’s history. It looks like 2010 is going to be even busier for these folks.

A short but thorough overview of the FCPA as applied to China was recently published in BusinessForum China. The article is a good read for anyone with business activities in China. One point discussed in the article concerns the application of vicarious liability. This is where most U.S. companies run into trouble with the FCPA, so its important to consider the implications carefully: 

U.S. authorities regularly apply vicarious liability theories to hold parents liable for the misconduct of their subsidiaries and agents. Not surprisingly, MNCs subject to the FCPA often unwittingly incur FCPA liability through the misconduct of their Chinese subsidiariesand agents, without ever operating in China themselves. Although non-US subsidiaries, including Chinese subsidiaries,are usually not directly subject to the FCPA, if the parent is a US corporation or issues US securities, and authorised the subsidiary’s illegal acts, the parent may incur liability. In one notable example, a US corporation agreed to pay a total of USD 22 million in FCPA penalties for, among other things, allegedly using its subsidiary to process payments to agents and Chinese officials associated with SOEs.

According to US authorities, even if the parent corporation does not explicitly authorise the illegal acts by the subsidiary, the parent may nonetheless incur liability if it was aware of and failed to stop the illegal acts (which may constitute implicit authorisation); if it acted with “wilful blindness” (being aware of a high probability that a bribe will be paid and taking steps to avoid learning that fact); or if it discovered the illegal acts after the fact and then accepted monetary benefits arising from such acts. Nor can the parent escape liability simply because it is a minority shareholder in a Sino-Foreign joint venture. If the parent corporation cannot control the actions of the joint venture, it is still obligated to object to illegal acts, take reasonable actions to prevent the joint venture from continuing future criminal activity, and refuse benefits arising from the same.

Because vicarious liability is the easiest way for a U.S. company to unwittingly trigger an FCPA investigation, it's critical to keep track of what's going on in the supply chains, particularly when one or more subs or agents are involved.

The way companies have handled this varies. Some use auditors in the host country and others send reps to oversee the whole thing. 

How does your company handle this?

Trend to Watch: Look for 2010 to Be Another Record Year for FCPA  Enforcement Actions.

   -Santiago

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They say timing is everything. Following on the heels of my last post about the Foreign Corrupt Practices Act, comes Transparency International's hot-off-the-presses 2009 Corruption Perception Index  The Index focuses on corruption in the public sector and uses surveys to establish how much corruption is perceived to exist within the country. This year's worst included Afghanistan, Iraq, Sudan, Myanmar and Venezuela.

You can find the full rankings index here.

Huguette Labelle, Chair of Transparency International, made the following remarks on why the index is so important in identifying and stemming corruption:

At a time when massive stimulus packages, fast-track disbursements of public funds and attempts to secure peace are being implemented around the world, it is essential to identify where corruption blocks good governance and accountability, in order to break its corrosive cycle…

Stemming corruption requires strong oversight by parliaments, a well performing judiciary, independent and properly resourced audit and anti-corruption agencies, vigorous law enforcement, transparency in public budgets, revenue and aid flows, as well as space for independent media and a vibrant civil society… At the same time, companies must cease operating in renegade financial centres.

You can read more of his poignant remarks on Transparency.org in the article Corruption Threatens Global Economic Recovery, Greatly Challenges Countries in Conflict.
 

What do you think about the United States' ranking?

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 Last month, I was honored to attend a press conference and speak with Robert F. Kennedy’s daughter, Kerry Kennedy, founder of the Robert F. Kennedy Center for Human Rights. The press conference centered on Mrs. Kennedy’s recent tour of the toxic drilling sites in the Amazon province of Sucumbios in Ecuador in connection with the ongoing Chevron litigation. I have written several posts on the subject here and here.

 One of the issues raised at the conference with Mrs. Kennedy concerned the scandal involving Chevron's alleged bribery of a foreign official. You can read about the scandal in the Wall Street Journal article, To Combat Overseas Bribery, Authorities Make It Personal and in the New York Times article, Ecuador Oil Pollution Case Only Grows Murkier.

As reported in these articles, Ecuador`s Attorney General, Washington Pesantez, called on the U.S. Department of Justice to investigate Chevron for possible violations of the Foreign Corrupt Practices Act (FCPA).

The timing for Chevron could not be worse.  Only several months ago, Robert Khuzami, director of the Enforcement Division of the Securities and Exchange Commission, announced the creation of a specialized unit dedicated to the enforcement of the FCPA.. According to Director Khuzami:

the new unit will focus on new and proactive approaches to identifying violations of the Foreign Corrupt Practices Act, which prohibits U.S. companies from bribing foreign officials for government contracts and other business".

There has been an enormous surge in FCPA and anti-corruption enforcement by U.S. and foreign governments all around the world. That surge has resulted in unprecedented risk for U.S. companies operating overseas. As the risks keep spreading to more and more industries, no U.S. enterprise can even remotely afford the consequences of non-compliance.

Is your business completely ready to tackle these risks?

The following four guidelines may help to minimize risk exposure and maximize the cost-effectiveness of FCPA compliance programs.

1. Determine Where the Greatest Risks Lie--Degrees of risk vary for each business segment. If your company’s main dealings with government officials are with regulators, you will have different compliance challenges than if you are marketing goods or services to government buyers, just as you may have different challenges if you operate overseas through joint ventures as opposed to local representatives.
2. Start at the Top--Management teams that are committed to creating a strong compliance culture are much better at transmitting compliance goals throughout the whole enterprise. Does your company's compliance culture start at the top?
3. Identify Red Flags--If employees who see a red flag know to stop and ask for guidance, many if not most FCPA issues can be avoided. Lawyers and compliance personnel can make the legal judgments, advise on what may and may not be done, and indicate where lines need to be drawn.
4. Minimize the Use of Third Parties-- Corporations can significantly reduce their FCPA risk by eliminating or minimizing their use of third party consultants and agents over whom they have less than full control, particularly those who are paid commissions, success fees, or bonuses. To the extent a corporation can eliminate or avoid its reliance on third parties, it can, by definition, reduce its FCPA risk profile.

The current economic downturn and the accompanying uncertainties about job security may increase the usual pressures on managers to “make their numbers.” These pressures may tempt those responsible for foreign sales and deals to operate close to the line, or even cross the line, in their efforts to secure new business. The guidelines outlined above will serve to offset some of the risks inherent in operating overseas while still allowing managers to "make their numbers."

Does your company have a FCPA compliance program in place?

Trend to Watch: Look for a Significant Increase in the Number of Companies Instituting FCPA-related Compliance Programs.

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